Triggers of a housing market crash
A sudden drop in median income and a decline in credit could be the triggers that overturned the Canadian housing market. With the current closure, millions of Canadians have unfortunately lost their jobs. It may be fair to say that the country’s ability to afford a home has declined.
Meanwhile, the inability of individuals and businesses to repay their debt could trigger a credit crunch. Banks may tighten lending rules, which could further limit the purchasing power of buyers.
Ultimately, a combination of tighter lending and rising unemployment could force homeowners to sell their properties for less. However, this drop in prices is far from a crash and could be temporary.
Reasons for optimism
The fundamentals of the residential real estate market in major Canadian cities remain optimistic. Immigration could resume once the closure is complete and the viral epidemic has been brought under control. Professionals who can work from home could maintain their income, despite the recession. The economy is expected to rebound, even if it takes a few years.
In the meantime, the federal government has intervened to support Canadian households. A wage subsidy and various economic concessions could put a floor on the economy and prevent a collapse of the housing market. These measures could avoid many economic difficulties across the country.
Investors who expect a short-term retreat followed by a long-term recovery may see an opportunity to invest in REITs.
Canadian Apartment Properties REIT (CAPREIT), one of the largest residential REITs in the country, offers a dividend yield of 3.3%. The stock has declined 31.8% in the past month and is currently trading at 19.5 times net operating income per share.
CAPREIT’s peers, Minto Apartment REIT and Killam Apartment REIT, have experienced similar declines in recent months. Since the stock price has gone down, these REITs have offered better dividend yields.
However, investors should exercise caution. Avoid REITs with too much leverage, exposure to regions with unique economic problems (Alberta) or poor credit ratings. Money is king, so focus on trusts with enough cash.
These are unprecedented times. We have never seen unemployment and bankruptcy of this magnitude before. Unfortunately, it seems that the current pandemic can leave a permanent mark on our economy and our lives.
The chaos could spread to the residential real estate market later this year. However, there are reasons to believe that Canadian homes could hold their value, and households will be supported by the government’s budgetary efforts. This could make residential real estate a lucrative bet.
For investors who have the stomach for excessive risks, the residential real estate market could be ripe for a bet against the current. Take a closer look and choose trusts with strong balance sheets and good credit.
Good luck and stay safe!
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